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For other individual taxpayers allowed by law to report their income and
deductions under a different method of accounting (e.g. percentage of completion
basis, etc.) other than cash and accrual method of accounting , the gross sales or
gross receipts pursuant to this Section shall be determined in accordance with said
acceptable method of accounting.
SEC. 4. DETERMINATION OF THE AMOUNT OF OPTIONAL STANDARD
DEDUCTION FOR CORPORATIONS. - In the case of corporate taxpayers subject to
tax under Sections 27(A) and 28(A)(1) of the Code, as amended, the OSD allowed shall
be in an amount not exceeding forty percent (40 %) of their gross income.
For purposes of these Regulations, Gross Income shall mean the gross sales less
sales returns, discounts and allowances and cost of goods sold. Gross sales shall include
only sales contributory to income taxable under Sec. 27(A) of the Code. Cost of goods sold
shall include the purchase price or cost to produce the merchandise and all expenses directly
incurred in bringing them to their present location and use.
For trading or merchandising concern, cost of goods sold means the invoice cost of
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold, including insurance while the goods are in transit.
For manufacturing concern, cost of goods sold means all costs incurred in the
production of the finished goods such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse. The term may be used interchangeably with cost of goods
manufactured and sold.
In the case of sellers of services, the term gross income means the gross receipts
less sales returns, allowances, discounts and cost of services. Cost of services means all
direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including (a) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service, and (b) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies:
Provided, however, that cost of services shall not include interest expense except in the
case of banks and other financial institutions. The term gross receipts as used herein means
amounts actually or constructively received during the taxable year. However, for taxpayers
engaged as sellers of services but employing the accrual basis of accounting for their income,
the term gross receipts shall mean amounts earned as gross revenue during the taxable year.
The items of gross income under Section 32(A) of the Code, as amended, which are
required to be declared in the income tax return of the taxpayer for the taxable year are part of
the gross income against which the OSD may be deducted in arriving at taxable income.
Passive incomes which have been subjected to a final tax at source shall not form part of the
gross income for purposes of computing the forty percent (40%) optional standard deduction.
For other taxpayers allowed by law to report their income and deductions
under a different method of accounting (e.g. percentage of completion basis, etc.)
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accounting.
SEC. 5. ILLUSTRATIVE EXAMPLES IN DETERMINING THE BASIS
OF THE 40% OSD FOR INDIVIDUALS AND CORPORATIONS. Suppose
a retailer of goods, whose accounting method is under the accrual basis, has a
gross sales of P1,000,000.00 with a cost of sales amounting to P800,000. The
computation of the OSD for individuals and corporations shall be determined as
follows:
Gross Sales
If Individual
If Corporation
P 1,000,000
P 1,000,000
___________
800,000
____________
P1,000,000
200,000
.40
___________
.40
___________
OSD Amount
P 400,000
==========
P
80,000
==========
If the taxpayer opts to use the OSD in lieu of the itemized deduction
allowed under Section 34 of the Code, as amended, his/ its net taxable income shall
be as follows :
Gross Sales
If Individual
If Corporation
P 1,000,000
P 1,000,000
___________
800,000
___________
P 1,000,000
P 200,000
400,000
___________
P 600,000
==========
80,000
___________
P 120,000
==========
Net Income
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submit with his tax return such financial statements otherwise required under the Code.
Provided, that, except when the Commissioner otherwise permits, the said individual
shall keep such records pertaining to his gross sales or gross receipts. In the case of a
corporation, however, said corporation is still required to submit its financial
statements when it files its annual income tax return and to
keep such records
pertaining to its gross income as herein defined.
In the filing of the quarterly income tax returns, the taxpayer may opt to use
either the itemized deduction or OSD. However, in filing the final adjustment income
tax return, the taxpayer must make a choice as to what method of deduction it or
he shall employ for the purpose of determining its/his taxable net income for the
entire year. The taxpayer is, thus, not allowed to use a hybrid method of claiming
its/his deduction for one taxable year.
SEC. 8 . TRANSITORY PROVISIONS. - For taxable period 2008 which is
the initial year of the implementation of the 40% OSD under RA 9504 which
modified the OSD for individuals from 10% of gross income to 40% of gross sales/
gross receipts and introduced the OSD as an alternative deduction for corporations,
the 40% maximum deduction shall only cover the period beginning the effectivity
of RA 9504. RA9504 became effective July 06, 2008. However, in order to simplify
and provide ease of administration during the transition period, July 1, 2008 shall
be considered as the start of the period when the 40% OSD may be allowed.
In the case of an individual taxpayer, he is given the option to either use the
itemized method of deduction or the 40% OSD in the filing of his quarterly
income tax return covering the third quarter ending September 30, 2008. However, if
in the filing of his annual income tax return and he chooses OSD to be his method
of deduction, the rate of OSD to be applied for the period covering January 2008
to June 30, 2008 shall only be 10% of gross income (i.e., where gross income is
determined by deducting cost of sales from the gross sales or gross receipts ) while
the rate of OSD for the period covering July 01, 2008 to December 31, 2008 shall
be 40% of gross sales/gross receipts.
Example. - Mr. ERA, a retailer of goods, uses the accrual method of
accounting in reporting his income and expenses.
For the period January to June
30, 2008, he reported his net income using the itemized method of deduction where
his gross sales for the period amounted to P1,000,000 and his cost of sales for same
period amounted to P600,000. With the effectivity of RA 9504, he decided to use the
40% OSD in claiming his business expenses for the third quarter covering July
01 to September 30, 2008. His gross sales for said period amounted to P700,000
where he claimed a 40% OSD (P700,000 x 40%) or P280,000 in lieu of his actual
business expenses of P250,000 consisting of cost of sales of P200,000 and P50,000
operating expenses. For the last quarter of Year 2008, his gross sales amounted to
P900,000 while his cost of sales for the same last quarter amounted to P500,000. If
Mr. ERA decides to use the OSD method of deduction when he files his annual
income tax return, his net income under the OSD method of determining deduction
shall be as follows:
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(a) To compute for OSD allowed for the various periods covering the Year 2008 Jan. to June 30
Gross Sales
July 01 to Sept.
P 1,000,000
600,000
____________
P 900,000
-
____________
___________
400,000
P 700,000
P 900,000
.10
.40
.40
P 700,000
Oct . to December
____________
____________
40,000
==========
____________
280,000
P 360,000
===========
===========
(b) To compute for the net income of Mr. ERA under OSD the same shall be
determined as follows :
Gross Sales
P2,600,000
600,000
Less : OSD
(P 40,000 plus P280,00 plus P 360,000)
680,000
----------------
P 1,320,000
=========
The provisions of Sec. 6 above preventing the use of the hybrid method of
deduction for the entire taxable year, notwithstanding, a corporate taxpayer who opts
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period beginning July 01, 2008 while the method of deduction to be used prior
thereof shall remain to be under the itemized deduction method.
Example. - GSV Corporation, a retailer of goods, uses the accrual method
of accounting in declaring its income and expenses under calendar year basis. For
the period January to June 30, 2008, it reported its net income using the itemized
method of deduction where its gross sales for the period amounted to P1,000,000
and its cost of sales for same period amounted to P600,000 as well as operating
expenses of P100,000. With the effectivity of RA 9504, it decided to use the 40%
OSD in claiming its business expenses for the third quarter covering July 01 to
September 30, 2008. Its gross sales for said period amounted to P700,000 where it
claimed a 40% OSD of gross income with cost of sales amounting to P 300,000 or
P160,000 (i.e, P700,000 less P300,000 = P400,000 x 40% ) in lieu of its actual
operating expenses of P50,000. For the last quarter of Year 2008, its gross sales
amounted to P900,000 while its cost of sales for the same last quarter amounted to
P600,000 and operating expenses of P150,000. If GSV Corporation decides to use
the OSD method of deduction when it files its annual income tax return, its net
income for the year shall be computed as follows:
(a) To compute for OSD allowed for the period from July 06 to December
31, 2008
July 01 to Sept.
Gross Sales
Oct. to December
P 700,000
300,000
_____________
600,000
______________
P 400,000
P 300,000
.40
.40
_____________
OSD
P 900,000
160,000
============
______________
P 120,000
============
(b) To compute for the net income of GSV Corporation , the net income for the
period from January 1 to July 05, 2008 shall be computed using the itemized method
of deduction while the 40% OSD shall be applied for the period covering July 06,
2008 to December 31, 2008.
Gross Sales
P 600,000
Page 7 of 8
P2,600,000
October 1 to December 31
600,000
_ 1,500,000
Gross Income
P 1,100,000
Less : Deductions
Itemized Deductions
(Operating expenses
from January to June 30)
100,000
280,000
380,000
_________________
P 720,000
==========
Recommending Approval:
(Original Signed)
SIXTO S. ESQUIVIAS IV
Commissioner of Internal Revenue
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